Perspective Christopher Dann

Sartaz Ahmed
Owen Ward

Renewables at
a Crossroads
Contact Information

Amsterdam DC New York

Otto Waterlander James Hendrickson Owen Ward
Partner Partner Senior Associate
+31-20-504-1950 +1-703-905-4007 +1-212-551-6532
otto.waterlander@booz.com james.hendrickson@booz.com owen.ward@booz.com

Beijing Joseph Vandenberg San Francisco

Chris McNally Partner Christopher Dann
Partner +1-703-905-4005 Partner
+86-10-6563-8300 joseph.vandenberg@booz.com +1-415-281-5044
chris.mcnally@booz.com christopher.dann@booz.com
Sartaz Ahmed
Beirut Principal Nick Hodson
Dr. Walid Fayad +1-703-905-4080 Partner
Partner sartaz.ahmed@booz.com +1-415-627-4276
+961-1-985-655 nicholas.hodson@booz.com
walid.fayad@booz.com London
Nick Pennell Sydney
Tarek Elsayed Partner Rob Fowler
Principal +44-20-7393-3237 Executive Advisor
+961-1-985-655 nick.pennell@booz.com +61-2-9321-2864
tarek.elsayed@booz.com rob.fowler@booz.com
Greg Lavery
Principal
+44-20-7393-3409
greg.lavery@booz.com

Booz & Company

EXECUTIVE The global economic downturn has cast at least a measure of
doubt on the business case for renewable energy technologies,
SUMMARY
leaving some industry observers to point to previous periods
of renewables growth in questioning whether the market is
resilient enough this time to withstand volatile energy prices
and a shifting political climate. Yet, despite this uncertainty,
the market has evolved in important ways, setting the stage
for it to maintain its economic viability and continue to grow.
One of the hallmarks of the renewables sector today is its
structural diversity in terms of the technologies, players, and
geographic regions involved in its growth.

For that growth to continue, companies and investors

participating in the sector will need to explicitly address
uncertainty through effective risk management and
contingency planning. In many cases, even those investments
with promising near-term prospects will need to be evaluated
on the basis of their ability to adapt to future fluctuations in
demand. The relatively favorable investment climate of the
past decade attracted a bevy of companies that lacked the
expertise to build and sustain a competitive advantage. With
industry consolidation now on the horizon, those that survive
will be the ones that develop the strategic and operational
capabilities required to capture value and manage regulatory
and market risk.

Booz & Company 1

 Key Highlights
• The renewables sector is
far more technologically
diversified today than in
prior periods, stimulating
innovation and competition
and helping to ensure that
product characteristics
meet the targeted needs of
different customers.
• The geographic reach of
renewables is no longer
confined to certain regions
within the U.S., strengthening
the sector’s contributions
to local economies and
extending the base of its
political support.
• The renewables sector
has attracted a range of
new entrants that have
joined with industry
veterans to form a strong
“ecosystem” that is focused
on technology advances,
improved project economics,
and commercialization
successes.
• The current state of
oversupply has depressed
certain renewable asset
prices, creating opportunities
for acquirers with strong
project development and
management expertise.
• Targeting technology
companies in the higher-
margin segments of the
renewables value chain
and investing in emerging
technologies promising
dramatic cost reductions are
two high-risk, high-reward
options.
2 Booz & Company
THE
RENEWABLES
BOOM
Beginning in 2005, a number
of diverse factors came together
to accelerate the growth of new
renewable energy generation in the
United States (see Exhibit 1). Power
prices jumped as natural gas prices
reached a historical high, technology
advances led to significant reductions
in renewable energy costs, and the
investment community began to
invest in the sector in earnest.
But by far the biggest driver behind
the growth of renewables during
this time was meaningful policy
support, at both the federal and
state levels. With a focus on fighting
climate change and jump-starting
new industries, legislators adopted a
wide range of incentive mechanisms
to support the development and
adoption of renewable energy
technologies. These mechanisms
included the renewable portfolio
standard (RPS), renewable energy
credit (REC), feed-in tariff (FIT),
investment tax credit (ITC), and
production tax credit (PTC), along
with various cash grants.
Renewable Portfolio Standard
More than 30 U.S. states have
enacted renewable portfolio
standards, which mandate the use
of renewable power for a certain
percentage of retail electricity
sales and are largely seen as the
most effective policy approach to
supporting the growth of renewable
energy. Though each state implements
its own timing, targets, and
compliance, most states start with
moderate targets that, in some cases,
reflect existing renewable generation
capacities. However, in almost all
cases, the targets for 2015 and
beyond are well above 2005 levels,
and as a result, they have stimulated
much investment and planning. Wind
power, the least expensive renewable
power source, has been the dominant
choice of most states to date, but
technology-specific set-asides have
also helped to stimulate investments
in higher-cost solar and geothermal
technologies.
Renewable Energy Credit
REC trading programs are now
established in most states that have
RPS obligations to provide electricity
suppliers with flexibility in complying
with the mandate. RECs are tied
to generating units and can be sold
along with or separately from the
underlying power generation to third
parties that, in turn, can redeem
them with regulators to satisfy RPS
requirements. These markets are
typically state-specific, vary in their
setup, and are still in their infancy.
However, the arbitrage opportunities
in the REC markets have been critical
in attracting private-sector investors,
as they have incentivized investors to
bundle RECs acquired from single
providers and sell them at a premium
 to companies that need to satisfy RPS Feed-In Tariff
(U.S. Nameplate Capacity, in
As with RPS mandates, FIT
Gigawatts)

obligations. Some states have also set Feed-in tariffs, which establish a commitments vary significantly
REC prices for specific generation guaranteed price for the generation Mix across states and tend to favor certain
technologies (such as solar RECs, output over a set period (typically technologies. Consequently, in
or SRECs) to help provide cash flow 10 to 15 years), are also selectively combination with regional wholesale
certainty to investors and secure employed by state and local power price variation, returns vary
financing (see “New Jersey’s SREC governments as a way to encourage widely across technologies and states
Success,” page
RENEWABLES MIX 6). utilities and developers to invest (see Exhibit 2).
(U.S. NAMEPLATE CAPACITY, IN GIGAWATTS) in new renewable energy capacity.
GW
55
50
Exhibit 1
45 CAGR CAGR
Renewables Ramp Up
40 (’90-’05) (’06-’10)
35 Wind 14% 26%
30 RENEWABLES MIX
services and 25 (U.S. NAMEPLATE CAPACITY, IN GIGAWATTS)
20 GW
ion in market
15 55 Solar 0% 18%
eased quality
50 Geothermal 1% 2%
10
45 Biomass Waste 4%CAGR 3%CAGR
5
Biomass Wood 1%
(’90-’05) 0%
(’06-’10)
good business 0 40
needs of green 1990
35 1995 2000 2005 2010
Wind 14% 26%
ission; ready to 30
ology products Gigawatts)
een supply chain 25
(U.S. Nameplate Capacity, in
20
15 Mix Solar 0% 18%
chain to pass Geothermal 1% 2%
10
Biomass Waste 4% 3%
ent elsewhere 5
Biomass Wood 1% 0%
uality and service 0
1990 1995 2000 2005 2010

Note: Includes only plants currently in operation.

Source: SNL Financial

Exhibit 2 20-yr contract FiTs

Returns Run the Gamut

RISK VS. RETURN

(UNLEVERED INTERNAL RATE OF RETURN, SELECTED STATES AND TECHNOLOGIES)
services and
High
ion in market 10
risk 20-year contract
eased quality
9 FITs provide CA
security Solar PV
8 Low to medium
solar returns CA
good business 7 NC Solar Thermal
even in high- CA
NC CA
needs of green 6 insolation PA PA Wind
ission; ready to regions NM
Risk 5 IN IN
ology products IN ME Biomass Wood
een supply chain 4
CA
CA
ME
PA 3 columns width NJ
ME
PA Biomass Gas
3 IN ME FITs and SRECs
NM
chain to pass 2 2 columns width bring strong Hydro
ME PA returns with
1 Geothermal
ent elsewhere moderate risk
uality and service Low 0
risk 0 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28%
Average Return

Notes: Risk is determined by the difference between the p10 and p90 values. Average return is the p50 value.
Source: Booz & Company Generation Technology Returns and LCOE model

Booz & Company 3

Investment Tax Credit and
Production Tax Credit
Beyond state-level incentives, federal
investment and production tax credits
have been on-and-off components of
American energy policy since well
before 2005, subject to extensions
by Congress. Despite uncertainty
about their longevity, both programs
have played a crucial role in the
development of the renewables sector.
ITCs have been favored by solar
photovoltaic (PV) manufacturers
and other industry participants
considering investments with high
capital costs (relative to recurring
costs). PTCs effectively guarantee a
Exhibit 3
Project Returns Buoyed by Incentives
PROJECT ECONOMICS
(EXAMPLE: 100-MEGAWATT WIND PLANT IN CALIFORNIA)
Typical Project Economics Components
Public Policy Support
Net Present Value
(in US$ Millions)
-$139 $53
Capital outlay Federal PTC
($2,280/kW) ($22/MWh
through 2020)
Notes: Capital outlay is net of depreciation tax shield. Feed-in tariff is incremental revenue relative to power revenues; 20-year contract. As proposed, feed-in tariff program in
California has not been finalized. RECs are eligible through 2025. Numbers might not add up due to rounding.
Source: Booz & Company Renewables LCOE and IRR model
4 Booz & Company
“fee” in the form of a tax credit for
every unit of electricity produced
(see Exhibit 3). As such, they are
a better fit for the wind energy
industry, due to the technology’s
lower up-front costs and greater
potential to generate ongoing cash
flows from producing power.
During the global economic
downturn, participation in both
programs was limited, since the tax
credit benefits are not immediate and
require reliable positive cash flows
for offsetting the credits. However,
this limitation (from investors’
perspective) was addressed by the
$83
$200
Power revenues Feed-in tariff
(2030+ = (2011-2030 =
$100/MWh) $117/MWh)
American Recovery and Reinvestment
Act of 2009, which temporarily
allowed cash grants in place of the
tax credits. This change, which was
recently extended for another year,
helped stimulate solar PV investment
in 2010. The Recovery Act also
renewed the PTC program through
the end of 2013 (2012 for wind),
helping to further strengthen the
business case for wind and biomass
investments.
While these policies have worked
in tandem to help increase demand
for renewables and create a
market, the sector has benefited
$73 $22
$246
Total NPV
Unlevered IRR = 21%
REC revenue Operating costs
($40/MWh
by 2015)
 on the supply side from scale and First Solar has driven significant cost China. These developments have
technology advancements, which
(EXAMPLE: 100-MEGAWATT WIND PLANT IN CALIFORNIA)
reductions in one thin-film helped cut crystalline silicon module
have reduced the cost for a wide technology in particular—cadmium costs by 45 percent, or more than $1
arrayTypical
of renewables technologies
Project Economics and
Components telluride (CdTe)—which has $73 per watt,
$22 since 2008.
$246
made them more competitive with witnessed a 74 percent reduction
Public Policy Support
established generation options. (more than US$2$83 per watt) in module Though cost reductions have been
cost since 2004. This dramatic less immediate and dramatic for
Of all renewables, solar PV has $200decline has made the less efficient other renewables technologies,
arguably
Net Presentbenefited
Value the most in the CdTe technology a viable large-scale the overall trend has been quite
(in US$
past Millions)
couple of years from scale and solution for commercial and utility favorable. New wind installations,
technology advancements. Solar customers. At the same time, the for instance, today enjoy a levelized
PV costs have decreased for both more established crystalline silicon cost of electricity (LCOE) net of tax
Total NPV
thin-film and crystalline silicon technology—preferred by residential credits that is roughly on par with
technology. Through a combination customers with limited roof space— supercritical coal and nuclear, even
of technology advancements, has benefited from advances in in the absence Unlevered
of a priceIRR
on=21%
carbon
-$139 automation,$53
assembly and other manufacturing processes and a shift emissions (see Exhibit 4).
advantages of scale,Federal
Capital outlay U.S. PTC
companyPower revenues
in manufacturing capacityREC
Feed-in tariff to lower-
revenue Operating costs
($2,280/kW) ($22/MWh (2030+ = (2011-2030 = ($40/MWh
AGR through 2020) $100/MWh) $117/MWh) by 2015)
6-’10)

26%

18%
2%
3%
0%

Exhibit 4
Closing the Gap with Traditional Generation Technologies

GENERATION COST
(INDICATIVE LEVELIZED COSTS BY TECHNOLOGY)

2010
$/MWh Baseload Renewables
services and (available technology) 435
440
ion in market Tax credits
-46%
eased quality 234
240 Capital and O&M (minus credits)
214 213
220
49
200 40 42
good business 180
needs of green
ission; ready to 160 Natural gas
ology products 140 generation at
een supply chain $6/mmbtu- 435
120
$4/mmbtu
100 89
184 84
174 171 6
chain to pass 80 68 67 60 12
3 52 47
60 12
ent elsewhere 83 4 13
40 64 72
uality and service 48 47
20 35
0
Supercritical Nuclear NGCC Solar PV Solar PV CdTe Solar Biomass Wind Hydro Geothermal
coal (2005) Solar PV Thermal Wood

Notes: $2/mmBtu coal; $25/ton CO2 starting in 2020; $5,060/kW nuclear capital cost; $4,200/kW solar PV capital cost. Renewables exclude backup power requirements. Numbers
might not add up due to rounding.
Source: MIT; Energy Information Administration; Lawrence Berkeley National Laboratory; Office of Energy Efficiency and Renewable Energy; industry reports and company filings;
Booz & Company analysis

Solar PV

Solar Thermal

Wind

Biomass Wood
Booz & Company 5
Biomass Gas

Hydro
Recognizing a favorable investment
environment, private equity and New Jersey’s SREC Success
venture capital firms committed more
New Jersey arguably has the nation’s most generous SREC mechanism,
and more money to the renewables-
which helped the state achieve a 13-fold expansion in its solar PV
heavy cleantech sector between 2006
capacity from 2005 to 2009, one of the highest increases in the country.
and 2008, exceeding $10 billion at
New Jersey’s SREC prices have increased from $250 per megawatt
the peak in North America alone.
hour in mid-2008 to well above $600 today. Throughout much of 2010,
These investors were assured that
the SREC price in New Jersey was more than 10 times the regional
predictable revenue streams from
wholesale power price and roughly double the SREC price in other
policy mechanisms such as feed-in
states. This price is supported by relatively high set-asides for solar
tariffs and long-term purchase
power in the state’s RPS and alternative compliance payment, along
agreements would help outweigh the
with several unique measures to incentivize project financing. The SREC,
technology risk. Investments were
in combination with investment tax credits and accelerated depreciation,
also influenced to some degree by a
can enable a utility-scale solar plant to earn a 20 to 25 percent internal
fear of missing out on the “next big
rate of return.
thing,” creating a herd mentality in
the market—at least before the global
financial crisis hit.

Private equity and venture capital

firms committed more than $10
billion in North America alone to
the renewables-heavy cleantech
sector between 2006 and 2008.

6 Booz & Company

FROM BOOM In the wake of the crisis, many of the
underlying factors that converged to
TO BRAKES drive demand for renewables have
faded, and others remain highly
uncertain.
One of the key elements supporting
the business case for renewables has
been high power prices anchored
to high natural gas prices. That
dynamic has shifted, now that
natural gas prices have retreated due
to the economic slowdown and the
development of unconventional gas
resources; most analysts forecast
that natural gas prices will remain
below $6 to $7 per million British
thermal units for the foreseeable
future. As such, renewables are likely
to face stiff competition from natural
Booz & Company
gas generation in markets without
revenue-setting FITs.
The worsening economic conditions
have also brought a shift in political
priorities, favoring budgetary
restraint over fresh spending on
environmental issues, and some
federal subsidies supporting
renewables may be sacrificed as a
result. The Democrat-controlled
lame-duck Congress of December
2010 was able to secure a one-year
extension to the ITC cash grant, but
a Republican-dominated House of
Representatives will likely be far less
supportive of such fiscal expansions.
While project developers may speed
up their plans again this year,
fearing a potential lapse of federal
7
subsidies, renewables investment state and local levels, where support reductions, solar PV will continue to
prospects would certainly dampen if for long-term FIT and REC contracts rely on significant public subsidies—
the cash grants or tax credits expire. could fall prey to state budget cuts. nearly 100 percent of retail rates
The same pattern could occur at the Even with projected system cost in 2013 (see Exhibit 5). In this

Exhibit 5
Solar PV Subsidy Requirements

SOLAR PV ELECTRICITY COST

(LEVELIZED FOR TOTAL SYSTEM)
LCOE
$/kWh
0.40

0.35 c-Si cost curve

~9 ¢/kWh subsidy
0.30 (almost 100% of retail price)
required even after
expected cost reductions
0.25

0.20 Price gap represents

required government
subsidy to PV producers
0.15
2013

0.10 2009 Average

Retail Price
0.05
Falling Input Costs Gas Peaker at
$4/mmBtu
0.00
0.0 0.5 1.0 3.0 3.5 4.0 4.5 5.0 5.5 6.0 System
Cost $/W
2013 Q1 2010
U.S.1 U.S.

Notes: U.S. average retail price from EIA; predicted cost derived from weighted average of global predicted 2013 cost (Lux Research). Projected 2013 system cost based on
global PV production cost forecast (Lux Research) adjusted for U.S. market.
Source: Lux Research; Deutsche Bank; SolarBuzz Quarterly update; EU Energy Portal; Energy Information Administration; Booz & Company analysis

8 Booz & Company

environment, a domestic federal
cap-and-trade regime, which would
have put a price on carbon emissions
and improved the competitiveness of
renewables, is likely off the table for
the foreseeable future.
Another potential headwind is the
amount of wiggle room that states
built into their RPS laws. State RPSs
remain one of the key drivers for
renewables, but there is sufficient
flexibility in the requirements to
dial back the mandates, meaning
renewables capacity may fall well
short of the stated goals. Most
RPSs have clauses allowing the
Booz & Company
requirements to be relaxed if
the price impact on customers is
deemed too severe. Seven states
have explicitly capped incremental
rate impacts at or below just 2
percent. Other states have limits
on customer bill increases, force
majeure mechanisms, or rigorous
approval requirements for annual
procurements. Furthermore,
the rate impact caps are often
vaguely worded, leaving regulators
significant flexibility. For instance,
they do not always specify the time
period for which the percentage
increase threshold applies. There
is also the question of how strictly
“Demand destruction” resulting
from the economic downturn has
slowed renewables development in
the absence of FITs.
states will enforce financial penalties
for noncompliance.
Beyond its impact on the specific
drivers listed above, the economic
slowdown has also caused overall
electricity demand to decline,
resulting in overcapacity in most
U.S. power markets. This “demand
destruction” has slowed renewables
development in the absence of FITs.
Less generation translates into
lower power prices, which weaken
the business case for renewables,
and there is little reason to add
new capacity when the market is
oversupplied.
9
TOO BROAD
TO FAIL
Some industry observers point to
previous periods of renewables
growth—such as the mid-1980s—in
questioning whether anything has
really changed to ensure the market’s
resilience in the face of volatile
energy prices and changing politics.
Yet, despite this uncertainty, we
believe the market has evolved in
important ways, setting the stage for
it to maintain its economic viability
and continue to grow. One of the
hallmarks of the renewables sector
today is its structural diversity along
several dimensions.
Technological Diversity
The renewables sector is far more
diversified today than it was in the
early part of the 1980s, when non-
hydro renewable generation was
primarily reliant on biomass (see
Exhibit 1). Biomass—both wood and
waste—accounted for more than 70
percent of renewable installations
through 2000. Though a convenient
and economical source of power
in areas like California and the
10
Northeast, biomass demonstrated
limited potential for either rapid
technological improvements or
large-scale capacity development.
Meanwhile, wind and solar
technologies were in their embryonic
stage. Consequently, the political
commitment to renewables as a
viable alternative to fossil fuels was
weak, particularly as the supply of
oil and natural gas increased and
prices fell.
Today, the renewable generation
portfolio in the U.S. is much more
balanced, in large part thanks to
wind and solar, which have grown
substantially over the last decade.
Diversity extends beyond the high-
level technology categories such as
wind, biomass, and geothermal to
the subsectors underpinning them.
For instance, the proliferation of
different solar technologies such
as thermal and PV—and the even
further subsets of thin-film and
crystalline silicon—helps to ensure
that product characteristics meet the
targeted needs of different customers
(for example, utility versus
residential). This technological
diversity carries a number of key
benefits:
• Regions often have expanded
flexibility to meet renewable
generation goals by leveraging
The renewables market has evolved
in important ways, setting the stage
for it to maintain its economic
viability and continue to grow.
technology alternatives that were
previously unavailable.
• Intermittent renewables technolo-
gies can complement one another
to help smooth output variations
and better match supply with
demand.
• Proliferation of different tech-
nologies enhances intra-renewable
competition, thereby stimulating
innovation and encouraging con-
tinuous cost improvements.
To this last point, other
opportunities may still exist to
bring down the cost of renewables
technologies and help them compete
with traditional generation sources.
Wind: Wind power, the most
widespread renewables technology,
has already benefited from $3 billion
in R&D spending over the past
decade, and the technology may have
reached the point of diminishing
returns. Still, the slowdown has
led to an estimated 30 percent
overcapacity, which should lead
to lower equipment cost and thus
help sustain steady growth in wind
installations.
Solar—CSP: Concentrating solar
power (CSP) is a mature but
reemerging renewables technology
Booz & Company
that exhibits strong growth potential
for the next five years. CSP plants
have been operating in California’s
Mojave Desert for nearly 30 years,
and despite the introduction of some
new technologies (such as the power
tower), most plants are expected
to feature the mature parabolic
trough technology. As such, most
technological breakthroughs to bring
down the cost have already occurred.
Despite this, the technology may
build enough momentum to scale
up component manufacturing
and reduce costs if CSP projects
continue to perform well in places
such as California and Spain and
installations increase.
Solar—Crystalline Silicon: Despite
significant progress on the cost
front in recent years, solar PV
remains the highest-cost renewables
technology and holds the greatest
potential for further cost reductions.
In crystalline silicon, there remain
several levers for further reductions
across the value chain, including
consolidation, scale, and increased
competition. Here, the impact of
the rise of Chinese PV module
manufacturers cannot be overstated.
These manufacturers have increased
their share of the market in the last
four years to more than 50 percent.
Today, the top 10 Chinese PV
module manufacturers combined
have six times the manufacturing
capacity of the top 10 U.S. module
manufacturers combined. Building
on their strong position in the
Booz & Company
module segment, these companies
will continue to integrate forward
and backward, setting themselves
up to deliver further cost reductions
through both innovation and
investments.
Solar—Thin Film: Beyond
pursuing scale economies, an
array of thin-film competitors are
testing alternative designs and
materials that promise to reduce
the technology’s cost per watt or
increase cell efficiencies. Though
unlikely in the immediate future, a
breakthrough development related
to manufacturing costs, material
costs, or cell efficiency could reduce
costs on the order of First Solar’s
experience with CdTe or that of the
Chinese crystalline silicon module
manufacturers.
Biomass: Wood combustion, the
predominant biomass generation
technology, is well established
and thus unlikely to experience
a breakthrough that would
reduce costs. The availability of
moderately priced feedstock for
a proven renewables technology
option has attracted significant
investment in potential new
biomass wood projects. However,
prospects for completion and
sustained growth hinge on public
support and regulatory treatment.
Specifically, uncertainty over
the carbon neutrality of burning
wood, along with concerns about
forest sustainability and health
implications, has triggered national-
and state-level debates about the
technology’s eligibility for RPS
compliance. The Environmental
Protection Agency’s recent ruling
to include biomass combustion in
greenhouse gas permit requirements
is at least a temporary setback
for biomass wood’s prospects.
As regulatory and political
developments continue to hang over
biomass wood’s future, attention
may shift to less controversial
technologies that convert waste to
energy.
Geographic Diversity
Renewable generation is no longer
confined to certain regions of the
U.S., and its new geographic reach
has positive implications for political
support and implementation.
Six years ago, just two markets—the
Western Electricity Coordinating
Council (WECC) and the SERC
Reliability Corporation—accounted
for more than 55 percent of the
nation’s renewable generation
capacity. The establishment of RPS
mandates in more than 30 states
has dropped their share to about
40 percent as other regions have
grown at a faster clip. The markets
of the Electric Reliability Council of
Texas (ERCOT), the ReliabilityFirst
Corporation (RFC), and the Midwest
Reliability Organization (MRO)
were among the biggest gainers,
adding a combined 23 gigawatts
of wind and lifting their share of
11
renewables capacity from less than
10 percent apiece in 2004 to 18, 12,
and 16 percent, respectively, in 2010
(see Exhibit 6).
Renewables technologies other than
wind have also helped new regions
of the country gain footholds.
For instance, several states with
relatively scant solar resources—
Massachusetts, New Jersey, and
Oregon—have seen significant
growth in PV installations, in large
part due to solar set-asides in their
RPS mandates.
The development of renewable
generation and supporting industries
has made them an integral part
of local economies in regions
throughout the country. With few
other industries in growth mode,
local politicians and economic
development officials have extended
a range of tax breaks and other
incentives to attract renewable
energy companies.
The sector’s geographic diversity
has also helped it address specific
technical challenges, including the
intermittent nature of renewable
energy sources. Distributing
renewables capacity more broadly
across the country helps to mitigate
such variability (that is, the wind
blows in different places at different
times).
Player Diversity
Compared to several decades ago,
when the renewables landscape was
relatively bare and uncomplicated,
the sector has attracted a range of
players from different industries and
geographies. These new constituents

Exhibit 6
Renewables’ New Geographic Spread

GEOGRAPHIC DIVERSITY OF RENEWABLES

(INSTALLED GIGAWATTS BY NREC REGION) MRO RFC

10 7
NPCC
2 2
WECC
19 2004 2010 2004 2010 4
9% 12% 2
9% 16%
8
2004 2010
10% 6%
2004 2010
40% 31%

SERC

3 5
SPP
2004 2010
16% 9%
5
1

2004 2010
4% 7%
ERCOT FRCC Installed GWs

11

1 2004 2010
1 1
Percentage of U.S.
2004 2010 2004 2010 renewable capacity
6% 18% 4% 2%

Notes: Excludes hydro. NREC = North American Electric Reliability Corporation. Percentages might not add up due to rounding.
Source: SNL Financial

12 Booz & Company

have joined with industry veterans
to form a strong “ecosystem” of
developers, suppliers, customers,
financiers, and others. The
emergence of this ecosystem, which
accelerated during the recent boom,
has brought needed innovation and
capabilities to the industry, and
helped to reduce its reliance on
subsidies alone.
For the purposes of this discussion,
we segment the new players into
three categories: those that improve
technology, those that improve
project economics, and those that
improve commercialization and
marketing.
Entrants Improving Technology
In recent years, market entrants
from other established industries
have brought new technologies into
the renewables industry, which
has helped to lower installed costs
and improve efficiency. Nowhere
is this more evident than in the
solar market, where several big
players have joined the fray to
take their own shot at capitalizing
on the market’s growth. General
Electric is reentering the solar
battle with a new CdTe design,
directly taking on market leader
First Solar. Boeing is getting into
the mix by applying technology first
developed in its satellite business to
achieve potentially record-breaking
efficiencies for solar panels.
Technology firms are increasingly
integrating downstream across
the renewables value chain. For
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example, leading Chinese solar PV
wafer and cell manufacturers, such
as ReneSola and JA Solar, have
expanded their businesses to include
module assembly, a critical step in
the value chain with low barriers to
entry. Further downstream, Sharp
and First Solar, manufacturers of
solar panels and modules, acquired
large solar project developers over
the last two years to gain a dedicated
sales channel in a competitive
development environment and to
have an integrated, end-to-end play
within the solar market.
Entrants Improving Project
Economics
The renewables sector has
experienced dramatic growth in
the number of project developers,
financial players, and other
intermediaries in recent years,
and this trend has been one of the
most critical factors behind the
recent boom.
Large international merchants
looking for geographic
diversification and small startups
with hopes of landing their first
customers were among the bevy of
project developers that flooded the
U.S. market over the past several
years. Their participation has helped
to identify the most attractive sites
and to secure financing, creating
a steady pipeline of renewable
installations with great potential.
Significant competition among
developers has helped to maintain
pricing discipline in power purchase
agreements. Companies such as
SolarCity have also helped to
stoke latent residential demand by
leasing solar PV systems for home
installations, thereby addressing
potential customers’ concerns about
financing the expensive systems
and managing their maintenance.
Though consolidation is likely
to occur in the coming years, the
robust developer market has already
provided a strong foundation on
which the industry can continue
to grow.
The entry of a diverse group of
financial players provided the
funding the industry needed to
establish its footing and identify
avenues to cut capital and installed
project costs. In recent years, a
number of firms began specializing
in renewables financing, while tax
equity partners became increasingly
involved; these solutions have offered
innovative approaches to overcoming
the limitations of existing financial
incentives. Infrastructure funds
joined them by adding renewables
positions for long-term steady
cash flows, a trend that will likely
continue.
Intermediaries such as REC brokers
and green power marketers have
provided additional channels to
improve project economics. The
creation of companies such as
Sterling Planet and Green Mountain
Energy has enabled project
developers to secure incremental
sources of revenue to achieve positive
net present value.
13
Going forward, the continued
growth of smart grid companies
and energy storage providers will
play a critical role in enabling
the next wave of renewables
development. Successful development
of economical energy storage
technologies would solve many of
the intermittence challenges faced
by wind and solar, improving
project economics. Similarly, the
widespread adoption of smart meters
and variable pricing will make solar
power more attractive, given that
its greatest output is during the day,
when demand is at its peak.
In addition, we expect that investor-
owned utilities will begin to
diversify upstream into new parts
of the renewables value chain.
Companies such as Duke Energy and
Exelon have already acquired large
asset ownership and development
positions. Utilities that build and
own the renewable generation and
transmission infrastructure, as
opposed to simply purchasing energy
through power purchase agreements
(PPAs), will have more balance sheet
flexibility than smaller renewables
financial players to build the new
transmission lines required to bring
renewable power from remote areas
to load centers.
Entrants Improving
Commercialization and Marketing
The introduction of new and
innovative business models—
particularly those that address
the technology’s sometimes steep
up-front costs—will likely decide
14
the pace at which renewables are
deployed in the marketplace. One of
the most important drivers of growth
in commercial solar installations
was the introduction of long-term,
fixed-price contracts for electricity.
SunPower and other companies have
introduced new pricing structures
whereby they install solar panels
on customer rooftops and charge
monthly fees similar to a lease
arrangement, rather than requiring
the customer to incur large, up-front
capital expenditures.
Similar approaches will be needed
if the sector is to fully tap the
potential in the residential and
small commercial market. Different
segments of the market will have
different wants and needs, but
the features are likely to include
quick and economical installations,
predictable power prices with no
up-front investment necessary, and
more elegant designs. A number of
companies are already offering more
sophisticated commercialization and
marketing, but more business model
innovation will no doubt occur as
the renewables market matures.
Application Diversity
Gone are the days when solar PV
panels were considered only for
small rooftop systems. Increasingly,
renewables technologies are
broadening in scope when it comes
to their potential application.
For instance, many solar PV
manufacturers remain singularly
focused on megawatt-sized projects,
but some thin-film rivals are
pursuing breakthroughs in off-grid
applications in a range of markets.
New consumer goods—such as
briefcases with solar power chargers
for mobile phones—are expected to
spur a compound annual growth rate
of 30 percent in the $300 million
market for flexible thin-film PV
modules.
The military is another likely
channel for future growth. The
energy demands of the military are
considerable: For every gallon of fuel
that reaches Afghanistan, six gallons
are expended getting it there. Solar
PV has the potential to substantially
alter the military’s dependence on
fossil fuels.
PV modules could also bring
electricity to many in the
developing world, where the grid
is underdeveloped and consumer
electronics such as mobile phones
have leapfrogged the infrastructure
built to support them.
Much work remains to make these
markets commercially viable for
photovoltaic applications, but all
have the potential to drive disruptive
change in the growth of demand
for and the manufacturing supply
of PV modules. One day, these new
markets could dwarf the traditional
rooftop market.
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 Renewables have been a hotbed of
A NEW LEVEL activity in the past decade, attracting
OF SCRUTINY a wide variety of companies—
asset developers, domestic and
international utilities, technology
companies, and financial companies
among them. The evolving
environment continues to present
opportunities for investment.
However, given the uncertainty
and complexity in the renewables
marketplace, investment decisions
are now much more difficult and
require decision-making skills and
tools that were not as essential
before the economic downturn.
Going forward, investment decisions
will need to explicitly address
Companies must develop the
capabilities needed to evaluate and add
value to the assets and technologies
that are likely to reenter the market.
Booz & Company
uncertainty through effective risk
management and contingency
planning. For example, utilities that
are looking to add renewable assets
will need to take into consideration
RPS mandate requirements,
resource availability, regulatory
treatment, subsidies, technology
alternatives, technology costs, and
rate impacts. In some cases, even
those investments with promising
near-term value will need to be
evaluated on the basis of their ability
to maintain downstream flexibility
and adapt to future fluctuations in
demand.
Furthermore, it will be critical for
companies to develop the capabilities
15
needed to both evaluate and add
value to the assets and technologies
that are likely to reenter the market
in the months and years ahead.
The relatively favorable investment
climate of the past decade attracted
a number of companies lacking
the expertise to endure and win
in this more difficult investment
environment. For example, a
number of small utilities and
other companies made subscale
investments in renewables where
they could add little value, and they
may soon be forced to divest those
assets. The companies that can pick
up the assets and position them
to create a sustained competitive
16
advantage will be the ones that
establish the right to win in this
market.
Renewable Asset Companies
Successful renewable asset owners
share a number of qualities. They
typically have location and portfolio
advantages, with assets in resource-
abundant geographies and the
ability to combine them with other
existing assets in their portfolio.
In addition, they have distinct
capabilities, including technology
knowledge, project financing
expertise, project development skills,
operations and maintenance ability,
and trading and marketing savvy.
Successful renewable asset
owners typically have location
and portfolio advantages, along
with distinct capabilities.
These capabilities vary by type of
player. For example, trading and
marketing savvy is more important
for unregulated players that do not
have access to captive customers,
particularly if they are pursuing
merchant positions. Capabilities can
also be complementary. Utilities and
merchants with financial flexibility
and operating experience, for
instance, are natural partners for
financially constrained developers
with technology expertise.
Companies vying for ownership of
renewable assets can accomplish
this through one of two means:
development or acquisition. Utilities,
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merchants, and international
companies typically go down the
development path, either on their
own or through joint ventures with
pure-play developers, though in
some cases, they acquire skilled
“developers” to add or expand
asset development capabilities. The
other option is acquiring assets with
PPAs from pure-play developers to
mitigate development risks.
As a result, the asset development
space is crowded; a wide range of
companies have project pipelines
in various stages of development.
In solar, for instance, many
technology players are forward-
integrating into asset development;
an example is First Solar’s recent
acquisition of project development
companies NextLight and OptiSolar.
In addition to bringing asset
development capabilities in-house,
such moves help create a market for
the company’s products and enable
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them to capture margins in the
highest-margin vertical of the
value chain.
One criterion for success in asset
development is the ability to secure
offtake agreements such as PPAs to
guarantee a future income stream.
Relatively few developers currently
have projects with PPAs, and there
is evidence that developers have
been underbidding for PPAs due to
the crowded nature of the pure-play
competitive space. Merchants and
utilities with ambitious plans for
renewables, along with forward-
integrating technology companies
and OEMs with deep pockets,
are increasingly on the prowl for
developers with established PPAs
and capacity at scale.
As the industry matures, there is
likely to be consolidation among
companies dominating the asset
development segment, including
mega-merchants, utility affiliates,
and technology firms. While the
best of the pure-play developers will
survive, the competitive bidding
environment will continue to
present challenges, limiting returns
to the high single digits for even
the most adept developers. The
capabilities that will help developers
differentiate themselves from the
pack will likely come from strong
project development experience,
including siting, and construction
management. Developing and
maintaining a reputable management
team that is able to secure financing
and offtake agreements at the right
prices will also prove critical.
Given the various challenges of asset
development, many industry players
prefer to acquire assets as a way
to build a position in renewables
without taking on development risk.
The current state of oversupply in
many renewable energy technologies
17
has supported this strategy, as it has
pushed prices below replacement
cost for many existing generation
assets (see Exhibit 7). As a result,
renewables transaction values
have reached as low as $1,200 per
kilowatt for certain wind generation
assets—a significant discount to
the levelized cost to build them.
Therefore, there is a clear advantage
for asset acquirers that can find
undervalued assets.
However, asset prices do vary,
depending on their quality and
other considerations. For example,
assets with secure PPAs trade at a
premium, reflecting the safeguard
they offer against price fluctuations.

Exhibit 7
How Development Compares with Acquisition

BUILD VS. BUY

(IN $ PER KW)
-30%
1,595
Wind
2,280

-46%
1,494
Biomass
2,750

3,460
Geothermal
3,150
+10%
-29%
1,763
Hydro
2,500

-41%
540
Combined Cycle
915 Buy
Build
-22%
310
Peaker
395

Notes: “Build” figures based on levelized investment costs. “Buy” based on average values of transactions in 2008-2010. Biomass includes waste-to-energy only. Only one
geothermal transaction in 2008. Solar data not available.
Source: SNL Financial; Barclays; Booz & Company analysis

18 Booz & Company

While transaction values for wind,
biomass, and solar assets have
generally fallen during the recession,
hydro and geothermal have
continued to trade at a premium,
reflecting their higher capacity
factors and reduced variability.
Renewables Technology Companies
The growth of the renewables sector
has also attracted an assortment
of technology plays in the U.S.
and across the globe. The solar PV
market, for example, has recently
drawn in large diversified companies
such as General Electric, Hyundai,
and Toshiba. At the same time, new
and little-known Chinese companies
have established themselves as
competitors to established leaders.
Similar to renewable asset
companies, technology companies
face a host of regulatory and market
uncertainties in deciding which
technology to invest in and where to
invest along the value chain. Though
the long-term growth prospects are
indeed promising, shifting regulatory
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conditions and continuously evolving
technologies will force investors
to make significant bets on certain
technologies, companies, or markets.
For instance, they must consider
which technology solutions will
dominate in five years and what
downstream companies will stand to
benefit.
One way to help mitigate these
uncertainties is by targeting
companies in the manufacturing and
chemical industries that are focused
on the higher-margin segments
of the renewables value chain.
Specialized Technology Resources
(STR) is one such company in the
solar PV space. PV modules rely on
a thin, transparent laminate—an
“encapsulant” that is derived from
advanced chemical processing—
to protect cells from moisture,
ultraviolet rays, and heat. A leading
specialist in the encapsulant market,
STR has maintained gross margins
above 30 percent for several years.
Another potential high-risk, high-
reward investment choice relates to
emerging renewables technologies:
A dramatic reduction in cost
or a significant improvement in
efficiency could displace incumbent
technologies and companies. Several
companies in the solar industry,
including Nanosolar and MiaSolé,
are aggressively investing in R&D
to serve two very different markets:
utility-scale power, and consumer
electronics specialty products.
Outside investment in a startup
renewable energy company offers
enormous upside potential in the
best case, but the challenge is to pick
the right technology and company.
Ultimately, a successful technology
play will require a combination of
specialty product and innovation
capabilities, established positions in
adjacent value chain verticals,
an ability to develop a new
customer base, an understanding
of the renewables marketplace,
and the flexibility to adapt to a
dynamic market.
19
Conclusion Given the more challenging renew-
ables market and political environ-
ment, now is the time for companies
and investors to take a hard look at
their capabilities to ensure that they
are sufficient to create a sustained
competitive advantage. Truth be told,
many companies currently participat-
ing in the market do not meet this test
and will likely exit the market in the
coming years. Those that survive will
need to isolate and strengthen their
capabilities, hone their strategies, take
advantage of industry consolidation
to build scale, and partner with an
increasingly diverse array of special-
ized players to reach and influence
20
the market for their products and
services.
To be sure, some of the key policy
mechanisms and other supports that
triggered the boom in renewables
have weakened in the face of one of
the most severe economic downturns
in modern history. In some ways,
though, the renewables sector is
richer and more dynamic today than
when the boom began. Clear industry
leaders are already starting to emerge,
but plenty of opportunity remains for
those with the vision and the capabili-
ties to power the next era for global
energy markets.
Booz & Company
About the Authors

Christopher Dann is a partner

with Booz & Company based in
San Francisco. He specializes in
developing strategy, assessing
risk, and facilitating decision
making for clients in the U.S.
power, gas, and renewable
energy industries.

Sartaz Ahmed is a principal

with Booz & Company based in
Washington, D.C. She specializes
in developing strategy for clients
in the energy and infrastructure
sectors.

Owen Ward is a senior associate

with Booz & Company based
in New York. He specializes in
assessing markets, investment
decisions, and risks for clients in
the power generation, renewable
energy, and nuclear energy
industries.

Booz & Company 21

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